Last updated: November 6, 2026
Stablecoin depegging happens when a token trades away from the value it is designed to track, often one US dollar. It can follow doubts about reserves, redemption difficulties, thin liquidity or a design reliant on market incentives. A deviation can be below or above the target.
A peg is a target, not a promise of exchange at par in every situation. The BIS said in its 2026 Annual Economic Report that stablecoins cannot ensure par exchange across issuers and blockchains under all conditions. Redemption frictions and the liquidity of reserve assets can limit stability.
TL;DR
- Doubts about reserves, an issuer, a custodian or redemption access can pressure a peg.
- Liquidity and arbitrage may help restore a peg, but can weaken during stress.
- Algorithmic designs can face feedback loops when selling the stablecoin pressures a linked token.
What causes stablecoin depegging?
Depegs can involve several pressures at once. Concerns about an issuer or reserve asset can prompt selling, while limited liquidity or slow redemptions make it harder to close the price gap. The IMF’s December 2025 review identifies market, liquidity and credit risks in reserve assets, as well as operational and governance risks, as potential sources of stablecoin price volatility.
Stablecoin depegging from reserve or issuer concerns
Fiat-backed stablecoins depend on assets held to support issuance and on the issuer’s ability to manage them. If holders doubt the value, availability or custody of reserves, they may sell instead of waiting to redeem. The IMF notes that rehypothecating reserves can add leverage.
Bank exposure can matter even when a token has asset backing. In an analysis published December 17, 2025, the Federal Reserve reported that Circle disclosed $3.3 billion, about 8% of USDC reserves, was at Silicon Valley Bank during its March 2023 failure. Redemptions surged while primary-market operations were largely shut over the weekend, and USDC fell to 86 cents. The Federal Reserve analysis illustrates how access and timing can shape a market price.
Redemption delays and thin liquidity
A token can trade below its target when holders cannot readily redeem it for the underlying value, or when redemption is limited to certain users or hours. Exchange trading may continue while direct issuer operations are unavailable. With fewer buyers, sellers may accept a lower price. A market price below the target doesn’t by itself establish whether backing is impaired; redemption access and confidence also matter.
Market makers and arbitrageurs can help pull prices toward a peg by buying discounted tokens and redeeming or reselling them. But the process has limits. The IMF says borrowing constraints, transaction costs and market stress can weaken arbitrage. The BIS also points to redemption frictions and the liquidity and market depth of reserve assets. When trading or redemption becomes harder, arbitrage may be less able to narrow the gap.
A short-lived gap on one trading venue isn’t the same as a demonstrated inability to redeem. Sustained selling or impaired access can intensify concerns, so redemption conditions matter when interpreting a market price.
How confidence can turn into a run
The Federal Reserve’s December 16, 2022 analysis describes a self-reinforcing run. Falling collateral values or distrust of a custodian can prompt redemptions. Fire sales to meet them can further depress collateral values and encourage more holders to exit.
The March 2023 USDC shock also spread through DeFi. The Federal Reserve reported that DAI’s USDC-linked Peg Stability Modules were rapidly drained over the weekend, although DAI had no direct exposure to the failed bank. The episode shows how links between stablecoins and DeFi mechanisms can transmit stress beyond the issuer or asset at the center of a shock.
Algorithmic designs and feedback loops
Some stablecoins rely partly or wholly on incentives, collateral mechanisms or another token instead of conventional cash-like reserves. If confidence falls, holders may sell the stablecoin and use its mechanism to exit. That can pressure the linked token and weaken the support meant to hold the peg.
Why stablecoin depegging can accelerate in an algorithmic model
TerraUSD (UST) is a historical example, not a template for every stablecoin. The Richmond Fed reported that UST briefly fell to $0.985 on May 8, 2022, after liquidity was withdrawn from Curve the day before. Redemptions accelerated on May 9, when LUNA fell 48%. By May 12, its supply had risen from 0.4 billion to 32 billion as redemptions expanded it.
NIST’s September 2023 report describes the broader technical risk: a sharp decline in a volatile share token can prompt stablecoin sellbacks, increase the share-token supply and intensify its price decline. Technical and infrastructure problems can also undermine a peg.
Common peg supports and their limits
| Mechanism | Potential benefit | Limit or risk |
|---|---|---|
| Reserve assets | Can support redemptions at the target value. | Asset value, liquidity, custody and issuer operations can come under pressure. |
| Direct redemption | Can let eligible holders exchange tokens for backing assets. | Access, timing, fees or interruptions may constrain it. |
| Arbitrage trading | Can narrow a market-price gap when buying and redemption are practical. | Costs, borrowing limits and market stress may weaken the incentive. |
| Algorithmic support | Can use market mechanisms to target a stable value. | Confidence loss can trigger a feedback loop in linked tokens. |
Who this explanation is for, and who it is not for
This explanation is for readers who want to understand why a stablecoin’s market price may move from its target, and how reserves, redemptions and market structure interact. A market-price gap isn’t necessarily a confirmed problem with backing or redemption.
This guide can’t determine whether a specific token is safe or predict whether its peg will recover. Stablecoins carry risks including volatility, loss of funds, issuer or exchange failure, smart contract vulnerabilities, regulatory changes and scams. A past return to its peg doesn’t establish that it will recover in the future.
Bottom line
Stablecoin depegging can reflect problems with confidence, liquidity or redemption access, and those pressures can reinforce one another. Reserve-backed models face risks tied to assets, custody and operations; algorithmic models can face feedback loops. A market price near the target doesn’t ensure redemption at that value under stress. The label “stablecoin” doesn’t remove the possibility of loss.
Sources
- In the Shadow of Bank Runs: Lessons from the Silicon Valley Bank Failure and Its Impact on Stablecoins (www.federalreserve.gov)
- Understanding Stablecoins; IMF Departmental Paper No. 25/09; December 2025 (www.imf.org)
- The stable in stablecoins (www.federalreserve.gov)
This article is for informational purposes only and does not constitute financial or investment advice. Cryptocurrencies are highly volatile; always do your own research before investing.
The price predictions and financial analysis presented on this website are for informational purposes only and do not constitute financial, investment, or trading advice. While we strive to provide accurate and up-to-date information, the volatile nature of cryptocurrency markets means that prices can fluctuate significantly and unpredictably.
You should conduct your own research and consult with a qualified financial advisor before making any investment decisions. The Bit Journal does not guarantee the accuracy, completeness, or reliability of any information provided in the price predictions, and we will not be held liable for any losses incurred as a result of relying on this information.
Investing in cryptocurrencies carries risks, including the risk of significant losses. Always invest responsibly and within your means.
For advertising inquiries, please email . [email protected] or Telegram
